CEMENT INDUSTRY ANALYSIS

Eton Pinto (919)

Krist Maliakal (930)
Shiny Lopes (949)

INTRODUCTION
Cement is one of the core industries which plays a vital role in the growth and expansion of a
nation. India's cement industry is a vital part of its economy, providing employment to more than
a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement
industry has attracted huge investments, from both Indian and foreign investors, making it the
second largest in the world. The industry is currently in a turnaround phase, trying to achieve
global standards in production, safety, and energy-efficiency.
The Indian cement industry is extremely energy intensive and is the third largest user of coal in
the country. It is modern and uses latest technology, which is among the best in the world. Also,
the industry has tremendous potential for development as limestone of excellent quality is found
almost throughout the country.
India has a lot of potential for development in the infrastructure and construction sector and the
cement sector is expected to largely benefit from it. Some of the recent major government
initiatives such as development of 100 smart cities and Swacch bharat abhiyaan are expected to
provide a major boost to the sector.
Expecting such developments in the country and aided by suitable government foreign policies,
several foreign players such as Lafarge, Holcim and Vicat have invested in the country in the
recent past. A significant factor which aids the growth of this sector is the ready availability of
the raw materials for making cement, such as limestone and coal.

HISTORY
In the year 1889, a Kolkata-based company manufactured cement using Argillaceous. Later the
industry was organized in the early 1990s and India Cement Co was established in 1914 in
Porbandar. After the initial thrust to the industry during World War 1, it started growing in terms
of manufacturing units, production and capacity. The cement industry saw price and distribution
control system in the year1956 so as to ensure fair price to the consumers as well as
manufacturers. From the year 1977 to 1982 the industry went through multiple changes with
respect to its pricing system. Quota system was introduced to boost the industry. The industry
was de-licensed in the year 1991 which resulted in accelerated growth with availability of
modern technology. Heavy investment were made which lead to avail opportunities in the
domestic as well as global markets.

CURRENT SCENARIO

The Indian cement industry had a total capacity of over 360 m tonnes (MT) as of financial year
ended 2013-14.The Indian cement industry registered a compounded growth of about 8%.One of
the worlds largest and fastest growing cement industries, the Indian cement industry has been
expanding significantly on back of rising infrastructure activities, increasing demand from
housing sector, and construction recovery. The recent developments in the industry along with
the strong support of government are attracting the global cement giants. The first half of FY15
nurtured hopes of better growth but the second half was shot by a slowdown, especially in the
quarter ending in March because of the government cutting expenditure.

MARKET SIZE
With nearly 390 million tonnes (MT) of cement production capacity, India is the second largest
cement producer in the world and accounts for 6.7 per cent of worlds cement output. The
cement production capacity is estimated to touch 550 MT by FY 20. Of the total capacity, 98 per
cent lies with the private sector and the rest with the public sector. The top 20 companies account
for around 70 per cent of the total production.
A total of 188 large cement plants together account for 97 per cent of the total installed capacity
in the country, while 365 small plants make up the rest. Of the total 188 large cement plants in
India, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. Indias cement
production increased at a compound annual growth rate (CAGR) of 6.7 per cent to 270.32
million tonnes over FY0715. As per the 12th Five Year Plan, production is expected to reach
407 million tonnes by FY17.
The housing sector is the biggest demand driver of cement, accounting for about 67 per cent of
the total consumption in India. The other major consumers of cement include infrastructure at 13
per cent, commercial construction at 11 per cent and industrial construction at nine per cent.

CAPACITY PRODUCTION AND CAPACITY UTILIZATION

India's cement demand is expected to reach 550-600 million tonnes per annum (MTPA) by 2025.
To meet the rise in demand, cement companies are expected to add 56 million tonnes (MT)
capacity over the next three years. The cement capacity in India may register a growth of eight
per cent by next year end to 395 MT from the current level of 366 MT. It may increase further to
421 MT by the end of 2017. The country's per capita consumption stands at around 190 kg. The
growth per annum of net sales had peaked at 12.9% in FY10 and declining since reaching a

bottom of 4.5% in FY 14, it is expected that the FY 14 bottom will hold and that growth will
only increase from that point onwards.
An observed trend is the growing excess capacity in the system. Since FY09, the gap between
production and capacity has been growing. Companies are scaling up their production now when
its cheaper and during a down cycle when opportunity cost is low. However, they are expecting
the demand to resurge soon after which their investments will pay-off. However, this underutilization is affecting their margins since fixed costs arent being recovered. This was alright in
the short term but now the small players are bleeding and many are going bankrupt or being
acquired. This has resulted in the capital additions of cement falling down with capacity
additions falling to 6% in FY 14 from 19% in FY 10. There is no scope to increase price to make
up as demand is growing slowly and competition prevents players from increasing price and
improving their margins.
In the short term, Cement demand is still muted due to poor rainfall, real estate inventory pile up,
and weak subsidies. However, in the long term, demand will resurge and then additional capacity
will play an important role.

REGIONAL ASPECTS
Since cement is a perishable commodity, mines are located next to limestone veins. Additionally,
each region has its own production plants and their own markets since inter-region trade is not
feasible since 70% of costs are logistics and power. Cement production is divided into 5 regions
namely North, South, East, West and Central. Currently, the South accounts for the highest
production due to vast availability of limestones, followed by the Northern and Western region.
The South has the highest capacity with 126.9 MTPA which is 40% of total capacity followed by
the North with 66.4 MTPA which is 21% of total capacity.
Andhra Pradesh and Tamil Nadu have the highest number of cement plants with 30 and 21
respectively.
The East has the fewest number of production units with many of the states plants being only in
single digits.
Cement consumption varies across regions due to the differences in the demand-supply balance
per capita and the level of industrial development in each state. The Central and Eastern regions
has the highest growing capacity with 13.5% and 12%, thus there is a lot of growth potential
here. Meanwhile, the South region is growing at a short pace with only 5.6% growth.

Over the years, it has been observed that demand in the east has been driven by the housing
sector, whereas infrastructure, investments in industrial projects and the housing sector have
propelled demand in the Northern, Western and Southern regions.
South- Currently, there is over-capacity in the South which is stalling capacity utilization and
preventing price rise. The capacity utilization in the South is 40-45% while it is 70-75% in other
regions.
North- A confluence of growth impediments - slowdown in rural sales, weak demand for
organized housing and elusive infrastructure recovery - have further deteriorated cement
demand/pricing in north India .Attempts by the Northern players to increase price have been
unsuccessful due to demand not picking up and heavy competition. Increasing prominence of
regional manufacturers in the market with limited logistic challenges (largely roads) has led to
price wars. Now prices in north India are at a 35 per cent discount to south India. North India is
facing growth challenges, on account of infrastructure recovery remaining elusive and rural
demand deteriorating significantly in the last one year due to poor rainfall, low subsidies, wage
growth and paltry MSP hikes.
However, there is expected to be resurgence in demand due to the Governments investments in
infrastructure. Currently, Road and Highway projects worth Rs 2.2 Trillion are to be completed
in the year 2015-17, Swatch Bharat is expected to build 80 lakh toilets and although the real
estate sector is still bad, the industry is expected to witness project completions worth Rs 2
Trillion and over 1.9 Lakh Cr stalled projects have been revived.
The revival in the cement market is expected to come from the North and East regions. However,
North region will only make a recovery by FY 2018 on account of demand revival in the
infrastructure sector.

LIFE CYCLE

The life cycle of the Indian Cement industry has been largely cyclical in its performance. There
have been successive phases of growth followed by a slowdown. This is due to the nature of the
industry as a whole, dependent on the factors that affect its product. The stock prices of cement
companies are also affected by this volatility and thus valuing or analyzing a company and
industry based solely on that yard stick will be unjustified.
During growth phases which are brought on primarily due to increase in consumption; which
again is a result of factors such as increased infrastructure spending, rapid urbanisation, housing
sector growth; the cement companies tend to focus on capital expenditures to increase their

installed capacity. However, due to the added installed capacity, the fixed costs are higher as a
result. Thus, the margins that the companies can profit from are subsequently decreased.
Since, the industry has a nature of gleaning profits primarily as a means of their margins; the
companies face lower profits and margins. In order for this to abate the only possibility is to
increase the sales volume, which is not possible due to the nature of the product itself and the
competitive forces in the industry. As a result, there is a slowdown and then the industry as a
whole follows.
Thus an important factor to look at within the industry is the efficiency of a company. This is
best looked at from the point of view of capacity utilisation. The best companies in this sector
have a capacity utilisation within the range of the late 80%. Mid-level companies have capacity
utilisation around the 50% mark. This does make the smaller companies bleed money and
become potential targets in a brownfield expansion move by the better performing bigger
companies.
The sector has shown very good growth as compared to the country's economy. Historically it
has grown more in comparison with the economy. This remarkable progress has made India the
second largest producer of cement in the world, behind China.
Considering the issues with a limited availability of a key resource, gypsum, and effective coal
linkages; this is a good performance. Additionally, due to these seemingly restrictive factors, it
has forced the industry to be very lean in process efficiencies. Thus the Indian cement industry is
also one of the most effective industries in the world in terms of process efficiencies.
The CAGR of the industry has grown at the rate of 9.7% between FY06 to FY14. It currently
stands around 340 million tonnes per annum and is expected to increase to 550 million tonnes by
the year 2020. However, the cement companies have always kept their capacities ahead of
demand. This tends to affect the companies negatively in a slowdown and affect their profits and
margins due to fixed costs which remain high.

PORTER'S FIVE FORCES MODEL

1. Entry Barriers

It is difficult for a new player to enter the industry. The capital cost for setting up a fully
functional plant is Rs7200 per tonne. Considering that a mid level company has a capacity
anywhere between 30-40 million tonnes, setting up a competing firm is very expensive.
The distribution of lime stone reserves in India is limited and more or less in certain pockets of
the country. Due to the nature of the raw material and the end product, only a few mines of lime
stone are most suited for the production of cement. This has caused the formation of the major
clusters.
However, established players have captive mines already in the region and most have the best
suited mines for production. Additionally, gypsum reserves in India are very limited. Many
companies have thus resorted to purchasing rights or partnerships with gypsum mines across the
globe.
There are also the government clearances that are required to set up new plants such as these.
And since these plants will be environmentally sensitive, land acquisition and material disposal
also tends to be a barrier. Obtaining government permission and co-operation plays a major role
in the entry barrier.
One of the main strengths of an established company in this sector is the distribution channels
and marketing muscle at their disposal. The distribution channels help the company transport
their product to the end user from the production facilities situated in the cement clusters.
Since the product cannot be transported over large distances and care has to be taken for its
transportation, replicating or establishing new modes are very difficult. Thus, this also acts as an
entry barrier for a new player in the industry.

2. Bargaining Power of Suppliers

A majority of the companies in this sector have their own captive mines. Thus they reduce the
cost of transportation of the raw material to their processing plants. Due to this practice they also
set up plants within easy reach of their respective mines. As a result the manufacturers do not
face any issues from suppliers. They are the procurer of the raw material from the beginning.

The industry is heavily dependent on cheap, reliable and effective energy sources for the
production of cement, which is an energy intensive process. Thus, traditionally coal was used to
satisfy these requirements.
However, due to the coal linkages being reduced the companies have not only changed from
switching to alternative sources but also to more energy efficient ones. This gives suppliers of the
alternative sources bargaining power over the manufacturers for the supply.
Over the last few years the manufacturers have increased the price of the end product a few times
in unison. They have claimed that this increase is largely due to the increase in prices of raw
material. Thus, the companies that do not have access to their own mines are dependent on
suppliers.
Additionally, prices have also increased due to the rising costs of transportation for the end
product. This also points out to the suppliers of transportation having an ability to dictate prices
to the manufacturers.

3. Substitution Threat

Cement does not have any substitute. Hence, there is no threat of substitution for this industry.
Timber can be used only for low rise buildings. Structural steel can be considered as a weak
substitute for medium to high rise buildings. However, building safety regulations require
structural steel to be encased in cement for construction purposes due to fire safety. This actually
increases the importance of cement and thus there is no substitution threat.

4. Competitive Rivalry

The industry is dominated by a few large players and many mid to local level manufacturers and
suppliers. However, due to the nature of the industry and the product, the large players enjoy
economies of scale. This is not possible for local level and mid-scale producers.
The location of the deposits of limestone mines also plays a significant role in this industry. Due
to the location of deposits, there are a few cement clusters. As a result, most companies have set
up processing plants near these clusters.
However, cement cannot be transported over large distances. The more exposure it has to the
elements, which is bound to happen in transport, the more perishable it becomes with reducing

quality of product. As a result, competition is more or less regional in nature and is influenced by
the location of the mines and transportation facilities at the companies disposal.
As the sector is highly influenced by factors affecting demand and also by the capacity utilisation
arising from that scenario, during a slow down the prices also fall. As a result the manufacturers
have no real pricing power.

5. Bargaining Power of Buyers

The total production of cement in India is largely used to cater to the domestic housing sector.
65% of the production is used by the housing industry. The remaining of 17% is by the public
administration for infrastructure projects and 12% is exported.
The majority of the buyers hence arise from the housing sector. And of this sectr the retail buyers
form a bulk of the customer base. However, retail buyers do not have much bargaining power
over the manufacturers. Thus, they cannot leverage this to dictate pricing power.
Since there is relatively no substitute for cement, the buyers do not have any real bargaining
power either. The end product offered by the manufacturers is what they will settle for. Similarly,
the local markets are dominated by small regional or local firms, due to the cement clusters. This
causes the buyer to have even less of bargaining power.
Cement is a product that is essential for any construction or building purpose. It has no
substitutes and the product is of a certain kind. Thus the demand for the product is also relatively
inelastic and its remains the same at all price points.

Porters Analysis Conclusion

Competitive rivalry in the industry is moderate

Effect of substitutes is weak
Buyer power is minimal
Supplier power is high
Entry barriers are high

In essence, the horizontal supply chain has pricing power over final consumers, whereas the
vertical dimension of competition (threat of new entry and threat of substitution) is lacking due
to lack of the possibility of differentiated advantages in production.

COMPETITIVE STRATEGY

Although the Indian cement industry has some multinational cement giants, like Holcim and
Lafarge, which have interests such as ACC and Ambuja Cement, the Indian cement industry is
broadly home-grown.
Ultratech Cement, the countrys largest firm in terms of cement capacity, holds over 18% of the
domestic market, with ACC (50%-owned by Holcim) and Ambuja (50%-owned by Holcim)
having 10% and 9% shares respectively (as per FY13 capacity numbers). Many of the remaining
dozen top players are India Cements, Shree Cements, Ramco Cements, Lafarge, Birla Cement
and Binani Cement.
Between them, the top 6 and top 12 cement firms have around 50% and 70% respectively of the
domestic market. Around 100 other smaller companies produce and grind cement on a wide
range of scales but are often confined to small areas.
The industry has seen some consolidation in the past, and the same is going to be the mantra for
most large payers in the years to come. With larger capacities, companies enjoy a better cost
structure driven by significant vertical integration and location advantage with respect to
sourcing of raw materials and market access. Most small companies, because of lack of one or
more of these factors, have a weaker competitive position.
The industry economics and the regulatory actions exhibited by the Competition Commission of
India may push marginal players to consolidate. However, not all marginal companies would be
attracting acquirers. Companies with either access to resources (raw material and power/fuel) or
proximity to relatively under served markets or both are most likely to be targeted for
consolidation.
A few compelling reasons why Indian and foreign cement majors appear to be enthusiastic about
acquiring cement capacities in India include a). Excess capacity of the existing players which can
be used to fulfil the global demand at lower cost of production; b) Rising cost of greenfield/new
projects which also tend to have longer gestation period.

Competition in the cement industry initially occurs at the local level due to high transportation
costs and location of limestone mines. Competition cannot be based on price, as price cuts are
easily spotted because of the nature of the product, which is undifferentiated.
Competition is hence based on head-to-head market confrontation focused on price rebates and
sales volume, in order to expand market share. Any substantial price cut by a competitor results
in a price war. Rivalry also occurs when firms want to enhance their respective competitive
advantages on the basis of improved product quality or reduced production costs.
High transportation costs make location an important factor in a cement companys pricing
policy. The best location combines three advantages a) the plant is set up in a quarry with large
quantities of high-quality and easily-workable limestone; b) the plant is close to large urban
areas; and c) the plant is near a railway line or a road network allowing cement to be delivered to
faraway places. A cement plant located inland rarely sells outside a 300 km radius and would
normally sell the bulk of its production within 150-300 km.

FUTURE OF THE INDUSTRY

As a country, India has one of the lowest per capita consumption of cement in the world, even
when compared to other economies at similar prosperity levels (GDP per capita). Unlike
developed markets and large developing markets such as China, India has some distance to go to
create sufficient infrastructure, overcome a large housing deficit, and jump-start its slow pace of
urbanization. The growth potential for the industry, thus, looks promising.
As per a study by Global Construction Perspectives and Oxford Economics, India is expected to
become the worlds third largest construction market by 2025, adding 11.5 million homes a year.
Given this, the growth potential for the cement industry is huge. Domestic cement consumption
is expected to rise from around 265 MT currently to 400 MT in the next three years. Around 65%
of cement is consumed by the housing sector, while 17% goes into infrastructure.
Per capita consumption of cement in India at 185 kg per person per year is amongst the
lowest in the emerging world. Indonesia and Brazil, for instance, have per capita consumption of
225 kg and 345 kg respectively. Indias low consumption levels are due to three key reasons a).
Low infrastructure intensity, as we are largely a services-oriented economy, b). High level of
housing deficit, and c). Low pace of urbanization as compared to other countries. Per capita
consumption is however going to rise due to rising consumption from urban areas, rising nuclear
family households, and upgrades from non-pucca to more permanent pucca houses.
Looking at the initiatives taken up by the government such as the 'Swacch Bharat Ahbiyaan',
which includes the construction of toilets for sanitation; building of new highways for trade and
transportation, new railways projects, etc; they will give a significant push to the infrastructure
development. This will require and will entail a lot of construction activity.
The Government of India is strongly focused on infrastructure development to boost economic
growth and is aiming for 100 smart cities. It plans to increase investment in infrastructure to US$
1 trillion in the 12th Five Year Plan (201217). The government also intends to expand the
capacity of the railways and the facilities for handling and storage to ease the transportation of
cement and reduce transportation costs. These measures would lead to increased construction
activity thereby boosting cement demand. The Department of Industrial Policy and Promotion
(DIPP), report says that cement and gypsum products attracted foreign direct investment (FDI)
worth Rs 13,370.32 crore (US$ 2.24 billion) between April 2000 and February 2014.
Additionally, looking at factors such as the growing population with need for housing, the rise in
median income for households, the changing tastes of the middle class to more opulent and
luxury goods, etc; make a very promising outlook for the Indian cement industry.